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Monday, December 5, 2016

Will policymakers at the Fed raise interest rates at their December meeting? Wall Street oddsmakers increasingly think they will. One simple chart shows why.

The
chart tracks the economy’s progress toward the central bank’s target
of “stable prices and maximum employment.” The Fed’s rate-setting
Federal Open Market Committee (FOMC) has operated under this so-called dual mandate
since Congress amended the Federal Reserve Act in 1977. In recent
years, the Fed has interpreted “stable prices” to mean a rate of
inflation close to 2 percent per year, as measured by the annual change
in the price index for personal consumption expenditures (PCE). It
interprets “maximum employment” to mean the highest level that is
consistent with its 2 percent inflation goal, currently thought to be an
unemployment rate of about 4.8 percent.

We can use the two
components of the dual mandate to draw a bullseye that the Fed is aiming
for. Here is how things are going, seven years into the recovery from
the Great Recession. (All data shown in the chart are quarterly, except
for the last point, which shows the latest, still-incomplete data for
the fourth quarter of 2016—unemployment of 4.6 percent for November 2016
and PCE inflation of 1.5 percent for October.)

As
recently as the fourth quarter of last year, the Fed was missing the
inflation target by a wide margin on the downside and the unemployment
target by a smaller margin on the upside. Small wonder, then, that when
the FOMC raised interest rates at its December 2015 meeting, many
critics saw such an action as premature. That was especially true for
those who hold the orthodox view that 2 percent inflation is a not an
unconditional ceiling, but rather, a target that may acceptably be
exceeded for a time after a long period of below-normal price increases.

Sunday, December 4, 2016

Dramatic promises to restrict international trade were a signature
element of Donald Trump’s presidential campaign. So far, he seems to be
following through, with an early reaffirmation of his intent to withdraw
US participation in the Trans-Pacific Partnership (TPP).

An
aggressive stance on trade played a key role in gaining the support of
working class voters in Midwestern manufacturing states, where upset
wins swept him into the White House. What is more, trade is one area in
which Trump, as President, will have the power to act on his own
without action by Congress. As Gary Clyde Hufbauer
of the Peterson Institute has explained, both the US Constitution and
past acts of Congress give the President ample authority to do things
like withdraw from the TPP or NAFTA, label China a currency manipulator,
or impose retaliatory tariffs on any country he sees as a threat to US
economic security.

But how would American workers actually fare
under a protectionist regime, especially older workers, and those with
few skills and little education, who voted for Trump by wide margins? Not well. Here is why a protectionist shock could do more to harm than to help the US job market.

Friday, November 18, 2016

The recent presidential election was characterized by attacks on free trade from leading candidates in both parties. As I detailed in my earlier post, "The Bipartisan War on Free Trade," eventual winner Donald Trump broke sharply with the traditional free trade position of the Republican party. Populist Democrat Bernie Sanders drove his rival Hillary Clinton to abandon her earlier embrace of trade. Cracks have even appeared in the formerly almost monolithic support of trade among economists.

I have now pulled together the key points from several earlier posts and articles for a new slideshow, "Free Trade under Fire," available for viewing or free download on my Slideshare page. The slideshow is suitable for classroom presentation or for discussion by community groups. Contact me if you would like me to present the slideshow to your class or community group.

Highlights of the slideshow:

Four flawed arguments against free trade:

Deficits mean we are losers

Blame it on currency manipulation

Protectionism will bring back manufacturing jobs

Don't trade with the poor

Why the real problem with trade is slow adjustment to trade shocks

Five factors that slow adjustment to trade shocks, with discussion of reforms that could speed adjustment:

Thursday, September 22, 2016

It is not surprising that there is little love for Donald Trump’s
presidential candidacy among the leaders of top US multinational
corporations. Why then, asks Andrew Ross Sorkin of the New York Times,
do they not speak out? Why do they quickly follow up their private
comments with, “I could never say that on the record”? I find some of
the views reflected in Sorkin’s article disturbing.

The attitudes of top executives would be more understandable if they
centered on the issue of free trade, but they do not. Yes, big business
has profited from past trade deals and backs new ones like the TPP and TTIP,
which Trump promises to cancel. But Trump’s Democratic opponent and a
majority of Congressional candidates from both parties have also joined
the anti-trade bandwagon,
so trade policy is in for a change no matter who wins this election. As
Trump himself would say, there’s something else going on.

Trump the bully is one broader fear of the executive class. Sorkin quotes Reid Hoffman, co-founder of LinkedIn, who was one of the few willing to speak to him on the record:

People are fearful that, especially in a circumstance
where he might be in a position of extreme power as a potential
presidential candidate, that would be used in a retaliatory way, that
would be used in vengeful way. Everyone gets worried about being
attacked, and part of the logic and mechanics of bullies is that they
cause people to be fearful that they’ll be singled out and attacked.

It’s the same thing like on school grounds, when people won’t go help
the kid who is being bullied because they’re worried that the bully
will focus on them.

Yes, it is frightening to think about the ways a thin-skinned and
vengeful President might misuse the office. The entanglement of
corporations with government is such that there would be many
opportunities to punish enemies. Taxes, regulations, and government
contracts would be some of the most direct, but backdoor methods like
planting rumors or leaking documents might be easier, and just as
damaging. A President Trump might install a compliant security chief who
would give him access to a company’s internal phone and email
communications, encrypted or not. The tools at the disposal of a
spiteful president would make something like closing a bridge look like a
playground prank.

Friday, September 9, 2016

Hillary Clinton is often said to be a policy wonk, deeply enmeshed in
specifics and details, but that may be a mischaracterization. In some
ways, her approach seems disturbingly superficial, skipping one
perceived problem to another with little attention to their underlying
causes. In some cases, Clinton seems to have paid little attention to
the unintended consequences of her proposals, as a real policy expert
would do. A look at the tax implications of some of her social policy
proposals will illustrate these shortcomings.

How progressive? Nominal vs. effective tax rates

Discussions
of by both supporters and critics have characterized Hillary Clinton’s
tax policies as progressive. The appearance of progressivity arises from
her pledge to raise tax rates and close loopholes for the wealthiest
Americans, while leaving nominal tax rates for middle-class families
largely unchanged. According to an analysis by the Tax Policy Center,
her proposals would increase revenue by $1.1 trillion over the next
decade, with nearly all of the tax increases falling on the top 1
percent.

However, the conclusion that Clinton’s policies would
have little effect on middle-class families is based on a narrow view of
taxes—one that takes into account only the money that taxpayers hand
over to the IRS. Economists have long favored a broader concept called
the effective marginal tax rate (EMTR), which includes
reductions in government benefits that occur as income rises as well as
increases in taxes paid. Some little-noticed features of Clinton’s
education and healthcare policies would have the unintended consequence
of raising effective marginal tax rates on middle-class families to
levels far above those that top earners would face.

Wednesday, August 31, 2016

A healthy economy requires a fluid labor market. Even when total
employment and output are stable, thelabor market is in constant
motion. Jobs disappear when firms close or downsize. Other jobs appear
when new firms open or old ones expand. People move freely from one job
to another in search of career advancement or better fit between their
work and their personal lives.

Unfortunately, the US labor market
is becoming less fluid. We can trace part of the decrease in fluidity to
outside factors like an aging labor force and changing business
practices, but much of it stems from ill-considered labor market
policies. Of these, one of the most damaging is the spread of
occupational licensing over recent decades. As we will see, Democrats
and Republicans share the blame.

How can we measure labor fluidity and why do we care?

A paper
by Stephen J. Davis of the University of Chicago and John Haltiwanger
of the University of Maryland charts the decline in US labor market
fluidity. Using data on quits, layoffs, and job openings from the Bureau
of Labor Statistics, supplemented by other data sources, the authors
construct three fluidity indicators:

The job reallocation rate
is the sum of the number of jobs created at new and expanding firms
each calendar quarter and jobs destroyed at firms that close or
downsize. Newly created jobs include both those that are immediately
filled and job openings that become newly available but not yet filled.

The worker reallocation rate
is the sum of the number of hires, quits, and layoffs. It includes
people who move directly from one job to another; those who move from a
job into unemployment or out of unemployment into a job; those who leave
a job and, at the same time, leave the labor force; and those who enter
the labor force and immediately take a job.

Churning
is the amount by which the worker reallocation rate exceeds the job
reallocation rate. If people changed jobs only when their current job
disappeared and took only newly created jobs, the rate of churning would
be zero. The rate of churning, then, represents job changes that are
motivated by career advancement opportunities or personal choices,
rather than forced by job creation or destruction.

The
following chart from Davis and Haltiwanger shows that all three measures
of fluidity have been decreasing in the United States. Their paper
includes many more charts showing decreases in other measures of
fluidity, decreases in underlying indicators like quits and hires, and
decreases by state and demographic group. The decreases in fluidity have
been widespread, but they appear to have affected men more than women
and less educated workers more than those with college educations. Key
aspects of the decline in labor fluidity appear to be unique to the
United States, or at least more pronounced here than in other advanced
economies.

Monday, May 23, 2016

The unemployment rate published monthly by the Bureau of Labor
Statistics is one of the most widelywatched of all economic indicators.
But why? What does it really measure?

The news media,
politicians, and voters tend to see the unemployment rate as an index of
the social stress of joblessness. There is ample evidence to support
that view. Researchers have linked high unemployment rates to increased mortality and impaired mental health. A recent cross-sectional analysis shows a strong relationship between unemployment and suicide. There is evidence that unemployment undermines personal relationships,
although the impact on divorce rates is ambiguous: A weak job market
can break up some couples while leaving others stuck in bad marriages
because they can’t afford divorce. Rising unemployment is also
associated with higher crime rates, for both violent and property crimes. There is even something called the misery index, which is the sum of the unemployment rate and the inflation rate.

Economists,
on the other hand, more often view the unemployment rate as an
indicator of economic slack. People who want to work but are not working
are a wasted resource. Finding jobs for them would add to GDP. Monetary
and fiscal policymakers watch employment indicators closely because the
more slack there is in the labor market, the more room there is for
economic stimulus without risk of inflation.
The questions we need
to address, then, are, first, can the standard unemployment rate do
double duty as an indicator of both macroeconomic slack and social
stress? And if not, what might be better?

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